US markets reentered correction territory ahead of Fed speak, data and earnings.

Introduction

The US indices reentered correction territory today. The sell-off which began last Thursday has entered its 6th day and looks set to retest lows reached last month. Today's selling may have been sparked by the widening VW scandal, poor guidance from Caterpillar, or anticipation of Janet Yellen's speech scheduled for 5PM, but in the end part of a greater corrective cycle.

Today's action started in Asia as it always does. Markets in the region were mixed, the Nikkei fell -2.76% while the Chinese Shang Hai rose by 0.9% as traders struggle with slow/slowing growth and uncertainty over the FOMC rate hike. In Europe trading was a little more one sided. Indices started the day in positive territory, led by a rise in German Business Sentiment, but quickly fell as fear of VW contagion spread through the market. Indices in that region closed the day in the red with an average loss greater than -1.5%.

Market Statistics

Futures trading indicated a lower opening for the US market all morning. The trade indicated a loss close to -1% and firmed to -1% after the release of Durable Goods orders. Durables was weaker than expected and helped to depress trading although other data was positive. At the bell indices moved lower as expected. The SPX shed more than -0.5% in the first few minutes and extended that to greater than -1.5% at the days low. The low was hit late morning and resulted in choppy sideways trading until late afternoon. Late afternoon saw a mild rally. The indices moved up from their lows and just about reached break even levels. The last hour of trading was more choppy sideways action but left the indices near the high of the day at the close of trading.

Economic Calendar

The Economy

Janet Yellen's speech, scheduled for after the bell, is not economic data per se but yet had a huge impact on today's trading. It was by far the most heavily cited reason for today's sell-off although there were other reasons. This is the first we've heard from her since the last FOMC meeting, only a week ago, and was largely expected to be dovish, as was the FOMC statement. . . but more on that later.

Initial claims for jobless benefits came in a little higher than expected with a gain of 3,000. It hit 267,000 last week, the previous week was not revised. The four week moving average of claims fell however, shedding -750 to hit 271,750. Despite the gain claims remain near the long term low and consistent with healthy labor markets. On a not revised basis claims rose by 10.4%, slightly more than the 9.2% predicted by the seasonal factors. Not revised claims are now -8.3% below last years level and have been trending at levels below last for most of the year.


Continuing claims fell by -1,000 from an upward revision of 6,000 to come in at 2.242 million. The four week moving average is also fell, from an upward revision, shedding -6,000. This is the third month that continuing claims have been trending at this level, near the long term low and consistent with healthy labor markets. Based on this trend it looks like labor markets may be stabilizing.

The total claims number was a real surprise and one I am surprised did not get more attention today. Total claims fell by -118,826 to hit 1.988 million. This is a new low in claims going back until well before the housing bubble and 2008 crisis. On a year over year basis total claims are now -10.5% lower. This figure suggests some strength in jobs creation and hiring going into September and may indicate more good labor data is due out in next week's NFP/Unemployment report.


Durable Goods was the only negative report of the day. Durables declined on the headline by -2%, slightly better than consensus estimates. Ex-transportation orders were flat, ex-defense orders rose by 1%. This follows 2 months of gains in orders although last month was revised marginally lower. Within the report shipments remained unchanged, unfilled orders fell -0.2% and inventories remained unchanged.

Sales of New Homes surged by 5.7% in August to an annualized rate of 552,000. This is a larger than expected gain and sign of the ongoing recovery in housing. The July figures were also revised higher, leaving the August figure 21.6% above this same time last year. Inventories for new homes are down to about 4.7 months at the current rate of sales and, along with low inventories of existing homes, could lead to increase activity in the sector... as well as increased profits among the home builders. The Home Builders Sentiment Index echoes this possibility. It rose to 62 in September, the third month of gains ad the highest level in over 12 months.

Tomorrow be on the lookout for the 3rd estimate for 2nd quarter GDP. It is largely expected to hold flat or decline slightly from the last reading. So long as it is not wildly different it should be a non-event. Also on tap is Michigan Sentiment, expected to rise from the previous month. Next week is the first of October so will include the monthly labor data as well as other key pieces of macro-data.

The Oil Index

Oil prices tried to catch a bid today but remain near the bottom of the 30 day range. Price for WTI settled up more than 1.25% in today's session, followed by a 1.17% gain in Brent, due to unexpectedly large draw downs of US stockpiles. This is the 2nd week of draw down and, along with declining rig counts, another sign the supply/demand balance may be shifting. However, it is still too soon to tell and global supply/production remains high so I expect oil prices to remain under pressure until demand expectations begin to perk up.

The Oil Index was mixed in today's session. It set a new one month low, near the recent multi-year low, in early trading and then got a boost from oil prices that took it into positive territory later in the day. The index appears to be making a retest of support but has not quite reached it. Today's action is bullish, but tied to oil prices, and could easily reverse tomorrow. The indicators are mixed, stochastic is pointing lower in the near term but MACD remains bullish although it is declining and could cross the zero line at any time. The August low, near 1,025, is best target for strong support and could be tested in the near term.


The Gold Index

Gold got a big boost today, largely due to expectations of what Yellen might say later in the day. The dovish stance taken by the FOMC last week has led speculators to think she may firm that position today. This led to a weakening in the dollar and surge in gold prices that took them up more than 2%. Gold hit and surpassed the $1150 level but I suspect it knee-jerk at best; there were no changes to fundamentals this morning, and data continue to supports economic recovery.

The gold miners got a big boost from the surge in Gold Prices. The miners ETF GDX gained more than 6.5% in today's session and crossed back above the short term moving average. The indicators are bullish and pointing higher so this move could continue but they are also weak and consistent with a bull swing within the greater down trend. At best the miners are range bound with support along the all time low near $13 and resistance near $15.


OK, Yellen's speech, a speech on economic policy and inflation drivers with no Q&A, turned out to be more hawkish than last week's FOMC statement. She says that she and her colleagues are in general agreement a rate hike is still due this later this year. She says a delay in hiking rates could force the Fed to raise rates more abruptly than they have been forecasting and, believe it or not, they are still data dependent. It's starting to sound to me like there is some worry they may be waiting to long. Regardless the news helped to lift the dollar in after hours electronic trading.

In The News, Story Stocks and Earnings

Caterpillar was another reason the market was down in today's session. The international industrial behemoth lowered guidance and announced job cuts up to 5,000 workers. The company lowered revenue guidance by $1 billion as global sales come in lower than expected and growth concerns continue to weight. Shares of the stock lost more than -6% in the pre-market session, gapped lower at the open and closed at a 5 year low.


Several noteworthy earnings reports came after the close of today's session. Most notably Nike which beat on the top and bottom lines, produced 5% growth and revealed a 17% rise in future orders. This comes in the face of global slowing and despite stronger dollar impacts and sent shares of the stock up more than 5% in after hours trading.


Cintas, provider of rental uniform and safety products for businesses and employees, reported better than expected. Earnings were 3 cents ahead of expectations on an 8.8% growth in revenue that sparked execs to raise guidance for the full year. They now have full year 2016 EPS in the range of $3.79 to $3.88, a nickel ahead of the previous range but still only in line with consensus estimates. Shares of the stock held flat in after hours trading.


Bed Bath & Beyond reported in line with estimates and reaffirmed guidance. Guidance is in line with consensus estimates but a miss on comp store sales left investors in doubt. On a more positive note the board authorized a $2.5 billion share repurchase program that could help to support prices. Shares of the stock closed at a new 12 month low in today's session and drifted lower in after hours trading.


The Indices

The indices sold off today, again, driven by several factors including fear of Janet Yellen's speech and news from Caterpillar. Action was led by the Dow Jones Transportation Average which lost a little more than -1.0%. The transports have now retreat to support near 7,750 and look like this move could turn into a full blown test of support. The indicators are bearish and pointing to lower prices so a test of this level looks likely. A break below this level could take the index down to 7,500.


The Dow Jones Industrial Average made the next largest decline, just shy of -0.50%. The blue chips made a triple digit move to test 16,000 where support was found. This level produced a decent bounce but looks more like a round-number bounce more than true support. The indicators are mixed but are consistent with a retreat to support if not an outright test of it. MACD is bullish but retreating from its peak and fast approaching the zero line, stochastic has peaked and is moving lower following a bearish crossover. 16,000 could prove to be support but 15,000 or 15,750 look more likely.


The NASDAQ Composite made the third largest decline in today's session, -0.38%. The tech heavy index was able to create a white bodied candle despite the decline in prices in a sign of potential support but indicators are pointing to lower prices. MACD is about to cross the zero line in confirmation of the recent bearish crossover in stochastic consistent with the current market correction and expected retest of support. Support target is near the recent lows, near 4,350, but could be as high as 4,500. A break below this level is unlikely in my view at this time but would be bearish for the market in general and could take this index down as low as 4,100.


The S&P 500 made the smallest loss in today's session, only -0.33%, but is in much the same position as the others. Today's candle hints at support but is not confirmed by support targets or the indicators. The indicators are both consistent with a retest of the recent lows as foreshadowed by convergences with said lows. Current target is 1,900 with a possible move to the 1,880 level.


The market is selling off but not in a crazy out of control way. It looks like the indices are making a steady move down toward support targets in what could be a retest of recent lows and strong support levels. It could also be the beginnings of another leg lower but in light of economic trends and earnings expectations into next year I am leaning toward the former rather than the latter. In either event I think we may find out over the next week. Tomorrow is important in terms of data, but not as important as next week.

Something else to watch out for is the upcoming government shut down. Yes, were are facing another budget battle and potential government shut-down in just 6 days. This may be causing some fear in the market but if I remember correctly the last one, two years ago, barely fazed the market and provided a good buying opportunity.

Until then, remember the trend!

Thomas Hughes